Spread settlement in cash account

B

balaji

Hi,

I am new here, so forgive me if I have posted this in the wrong forum.

I have an IRA (therefore a cash account, no margin) account with ETrade, and I recently purchased a debit spread. The stock went up as I hoped it would, and the spread ended in the money. The problem is that after the two legs of the spread were assigned and exercised, ETrade has reduced my trading power to zero. They are saying that the money I got from the spread finishing in the money (and making me money) can't be released until the underlying stock trades settle on the Tuesday following the Friday on which the options expired in the money. Not only do I not have any money from the spread itself, I don't have access to any of the cash I had in the account before the spread finished in the money.

Is this normal? Do others with IRA's put up with the same problem every time a debit spread ends in the money? How do you get around it? Sell the spread before expiration?

I don't have the same problem with credit spreads. Even when they end in the money, my account gets debited for my loss, but the rest of my money is not locked up. I feel that Etrade is doing something wrong, but I can't find any resources online about how a spread is supposed to be settled in a cash account. If you can let me know your experiences and/or point me to some definitive resources that can shed light on what is supposed to happen, I would appreciate it. Thank you.
 
balaji said:
Hi,

I am new here, so forgive me if I have posted this in the wrong forum.

I have an IRA (therefore a cash account, no margin) account with ETrade, and I recently purchased a debit spread. The stock went up as I hoped it would, and the spread ended in the money. The problem is that after the two legs of the spread were assigned and exercised, ETrade has reduced my trading power to zero. They are saying that the money I got from the spread finishing in the money (and making me money) can't be released until the underlying stock trades settle on the Tuesday following the Friday on which the options expired in the money. Not only do I not have any money from the spread itself, I don't have access to any of the cash I had in the account before the spread finished in the money.

Is this normal? Do others with IRA's put up with the same problem every time a debit spread ends in the money? How do you get around it? Sell the spread before expiration?

I don't have the same problem with credit spreads. Even when they end in the money, my account gets debited for my loss, but the rest of my money is not locked up. I feel that Etrade is doing something wrong, but I can't find any resources online about how a spread is supposed to be settled in a cash account. If you can let me know your experiences and/or point me to some definitive resources that can shed light on what is supposed to happen, I would appreciate it. Thank you.
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Where these cash settled options like SPX or options on individual stocks that you had to take delivery of?
 
He said stocks--so I'll assume he took physical delivery.

And yes, this is ordinary. In a cash account, it's a free-rider violation to trade with unsettled cash. Since the transaction was actually the purchase of shares on your exercised call (if this was in fact a call spread), and a sale of the shares on your assignmen, you'll need to wait for the cash to settle before you can trade with it again.

The way around this is to close the position on Friday (and pay the .02-.05 it will cost to find a market maker willing to take up the other side of your trade).
 
Why does it work differently when I write a credit spread that goes against me? There is still an exercise and assignment, and I do take physical delivery of the stock and deliver it when the other leg of the spread is exercised. Why are spreads that close at a profit for me settled differently than spreads that close at a loss for me even when both those spreads closed in the money?
 
Referring to: "I have an IRA (therefore a cash account, no margin) account with ETrade,..."
Why "no margin"? Is that an ETrade limitation, or your choice to disallow margin?
 
I am not sure I understand what you are asking. Are you asking why it is an IRA or are you really asking why it is a cash account because it is an IRA? There is no way to set up an IRA with margin, so it is not my choice or ETrade's choice. It is the IRS's choice.
 
balaji said:
OK, researching it a little further, I do see that some brokerages like Fidelity offer some kind of "limited margin" arrangement that may mitigate some of the problems I am having with my ETrade account: https://www.fidelity.com/learning-c...rgin-trading-rules/limited-margin-trading-IRA

I still don't understand why debit and credit spreads are settled differently, but I will call ETrade and ask them about this.
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Did the credit spreads expire worthless? That is a different situation because no (additional) cash changes hands if they do.

Edit: Oops, never mind, you said if they go against you...
 
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